21 Credit Repair or Enhancement Strategies
Strategy #1. Check Your Credit Scores Once Year.
There are basically 3 credit bureaus that track credit rating. Although all use different terms (beacon, emprica, Issac Risk), they basically track: amounts, payment history, activity, type of credit, days late, number of accounts, who gives your credit, if open, or closed, and use of credit. The 3 services are listed below:
Credit report accuracy is important as they contribute to your overall “credit score”. There tends to be a number of mistakes on credit reporting history, some as simple as a spelling mistake of name, some as bad as the wrong accounts, and numbers for individuals. Best for you to check and make sure your accounts are accurate. Remove mistakes, and correct any wrong items.
Once a year you have the right to ask for a free credit report. The big 3 (at the request of the Government) created www.annualcreditreport.com A free service.
Credit reports do not give you your FICO score. The one score lenders use most often is the Fair Issac Consumer Organization score. You can find your FICO score at www.myfico.com A paid service.
Strategy #2: Fix Errors
Once you have the report, look for errors. Correct all information that is wrong. Common things to look for are:
- Social Security Number
- Address changes or incorrect
- Bankruptcy older than 10 years
- Delinquencies 7 years or more.
- Debts that are not yours.
- Duplication of accounts.
Whether you are on line, or off line (paper), you challenge the information and ask them to correct errors. The Fair Credit Reporting act gives them 30 days, once notified to correct or confirm the information as correct.
Strategy #3: Understand the Fair Credit Reporting Act
Commonly called the FCRA, the report gives a series of rules and guidelines for credit reporting agencies.
You can get a free copy of the act, at www.ftc.gov
There are hard enquires on your credit report and soft enquires. In fact the act specifies 8 legal reasons to access credit reports, many based on you giving permission to a company for to check your credit for a job, loan, credit, insurance or reference. That would be a hard enquiry.
Individuals cannot randomly access your report. You have to give them permission.
A soft enquiry is usually an update, or you checking on your own credit (not for a specific loan, or service). Does not reduce or change your credit rating.
To many enquires, for example getting 4 credit cards (loans), at one time, would reduce your credit.
Strategy #4: Not Using your cards
Most folks do not realize, NOT using your credit cards, will make it difficult to build a strong credit history. Even worst, is NO credit. Many vendors, look at people with no credit as bigger risks, than folks with marginal credit ratings.
Using your cards, will build comfort that you can handle credit. And lead to bigger credit increases.
It is my opinion, support by a lot of data and success stories, that CREDIT (GOOD Debt), can lead to wealth. The more you are able to borrow, the greater likelihood you can have assets, that can grow or pay income. An example, an apartment complex.
15% of your score is based on use of credit. Therefore use it…. Wisely.
Strategy #5: Too Much Credit…Great.
A great Myth. In fact if you increase your credit limits over time, your score will likely go up! You must ensure your debt to credit ratio is lower than 30%, one of the ways to keep the ratio in balance and low, is to increase your credit. I know an oxymoron.
Creditors want to see a “healthy” balance. Zero balance counts against you, so does being over 30 percent and 50 percent usage. The first does not make money for the credit card company, and the second a higher risk.
Generally, use about 10-29% of your available balance will increase your score. So, use it, pay it off, use it, pay it off. And see your score go up.
Strategy #6: A large purchase before a mortgage closing can cost you
Mortgages are funny. A large purchase like a second car, just before closing can have a huge effect. Keep purchase for after you have the house and mortgage. It is common practice for lenders to review your credit just before the closing.
Strategy 7: Understanding the 30% on Multiple cards.
Thirty percent is the right number, but you have to realize, it is each card, not the total percent. You need each card to be under thirty percent (30%). So, if you have multiple cards, it is a good idea, to “balance” them out. You will see a big FICO score improvement.
Strategy 8: Keep your cards active.
Too many card, misplaced, filed, lost or simply cannot keep track of them? Well having too many cards, that are unused can hurt your score.
You may end up affecting your score by not using them, or they may even close your account, because of no activity. A problem.
Closed accounts, lower scores. Never close an account. Use them occasionally and just pay off the balance.
Strategy 9: Too Many Credit Inquires
Too many inquires can hurt your score. So, don’t be shopping all the time! And depending on the type of credit, understand the affects.
For Auto and Mortgages, keep all within 14 days. They are counted as ONE inquiry. Therefore, keep those inquires bunched together. Sourced at one time.
Credit card companies and department stores make sure you spread out your applications for credit over time. One or two applications every 6 months or so, is a good rule of thumb.
Inquires expire in terms of lost points, after about 6 months, but too many, can stay on your report and affect you for up to 2 years. Credit restoration companies can get these removed.
Strategy 10: Separate Your Business Credit from Your Personal Credit
Keep your business and personal credit separated. Both can affect each other. Positive and negative. We want the business card to report under the business and personal card to report under personal credit. Mixing them can be a problem.
Using a personal card for business can sometimes put your percentages out of whack. In particular if you use it a lot. Reducing your fico score.
Get a Dun and Brad Street number. And start to build your business credit. Ensuring vendors and credit companies attached the credit to your business. It is useful to have both business and personal credit.
If you do get an offer for a “business” card, ensure it is being reported to business, and not your personal credit profile.
Strategy 11: Paying in the Grace Period
Read the terms and conditions carefully. The grace period may not be a grace period! There is the grace period, before the due date, and then usually a grace period after the due date.
Some mortgages, car payments, and card give a 10-14 day “grace” period, with no charges, after the due date. However, the payment is still considered late. If you start paying before the grace period (on time), your score will go up quickly.
Strategy 12: Maxed Out Credit
A terrible plan. Shows the credit company you cannot manage your money. You are considered higher risk. And it will lower your score. Keep the balance “healthy”, less than 30 percent.
In fact if you are using more than 90 percent of your cards, your score is being dramatically affected. Drop this down to 60-70% and see an immediate improvement. Drop to 50 percent and get more points. 30 percent and you are getting to the gold and your credit it back on track.
Ideally, be is 15 – 29.9% credit usage.
PS. Your mortgage balance must be getting smaller each month to improve your score, so interest only does not help.
PSPS: If you have multiple cards, and they are high balances. Attack one at a time. Getting control of one (under 30 percent), then the others. Obviously, the smaller account is easier.
Strategy 13: One Major Credit Card
Lots of folks think one major card is enough. Actually 3 cards is a better plan. You will achieve a higher score. Consider revolving credit cards from the four major providers – MasterCard, Visa, American Express and Discover.
Having more than 5 plus cards, can also cause issues. If they are not used, and or mis-used (over 30 percent).
Strategy 14: Making Minimum Payments
If you make the minimum payment you are going to be in debt forever. The average card is set up to ensure you have 22 years of payments, and pay 10 times the original amount borrowed. OMG.
Large purchases, and minimum payments are a recipe for disaster.
Even small purchase over time, can lead to a big balance. Interest on the balance can put you behind. It is a good idea, to always pay more than the minimum, to eat away at the balance over time. If it says $50, pay $100, even if you have to go without, just to lower the principle.
Strategy 15: Close Old Credit Accounts
Do not close an account, it affect your score and can remain on your report for up to 7 years.
15% of your score is the length of the credit history. Getting an older card removed, or closed, can affect credit history.
It is good idea, to keep cards active. Use one for gas. One for household payments. Etc. Just make sure they are automatically paid before the due date.
Strategy 16: Credit Card Companies Never Make Mistakes
Know your rights (fair credit reporting act). Challenge changes, challenge fees, and interest rates.
It is common for credit card companies to reduce limits, increase interest rates, and add fees. It is your right to challenge. Your right to negotiate and get these fees waived or removed. Or explain your side of the fence and negotiate.
Always check monthly purchases. Always check your statement.
Strategy 17: Cut your interest rate
Credit card are competitive. If you look in the mail box, or email, you are always getting an offer for 3.9 percent or zero for 6 month card. Yet we throw them away. Foolish. First, we could give ourselves some credit, more importantly, we can use these offers to negotiate with our own credit cards.
Lots of folks do not know, their credit cards are at 12%, 18%, even 28% interest rates. That is expensive money. No wonder the balance is growing.
Call up your cards, ask what the interest rate is, and then ask them to match the zero percent card or 3.9 per cent card. Many will drop your interest rate for at least 6 months. That will save you money!
Strategy 18: Paying Your Credit Card Bills on Time
35%, of your credit score is based on payment history. This the number one way to improve or screw up your score. Start paying on time. Before the grace period.
Credit cards companies punish you with fees, penalty, and increased interest rates if you do not pay on time. That is a hint. Delinquency will result in lowering your credit score.
Three factors that affect your score:
- Frequently you are late (how often)
- Recent late payments
- How long late (30, 60, 90+ days).
The more recent the late payment, the greater the negative affect on your score.
PS: Type of debt is another factor. One late on your mortgage can drop your score by 75-100 points. Pay on time.
Strategy 19: Replacing expensive interest with new cheap interest
Makes perfect sense. Let us say you have credit card (for 20 years), and the interest some how got up to 18 percent. You were late a few times, and they sent you notice the card interest rate was changed, and moved up. And you carry a balance.
You decide to take one of the cheap 3.9 credit card offers. Move the balance over to the new card, and cancel the old one.
You are a happy camper because now, your payments are lower, and that is sound financial planning. Only problem, you just lowered your credit score.
Because the new card has no history, and you lost the old card “length”, therefore reducing your score. Not to mention, closed cards can reduce your score too.
Strategy 20: Renting is Better? No
Renters are often considered to be at higher risk than home owners. A mortgage, paid on time, gives you a better Fico score.
Strategy 21: Know the details of the credit offer
Asking questions to know how credit is extended is a good idea. What the “rules” are long before you get there. Get pre qualified, or understand how to get qualified. Ask questions like:
- What is the minimum credit score to be approved for this offer?
- What credit bureau is used to get your credit scores?
- What is the best interest rate?
- Will the interest rate change with FICO score/
Figure your outcome before you apply.